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Ukraine’s Anti-Corruption Agency Alleges Fraud In Arms Industry

KIEV, Ukraine -- Ukraine’s embattled anti-corruption commission has been investigating wrongdoing in the state-run defense production enterprise, a consortium of around 130 companies with close ties to the country’s president, according to documents and interviews.

An activist wears a mask depicting Ukraine's President during an opposition rally in front of the Ukrainian parliament in Kiev on October 22.

The country’s National Anti-Corruption Bureau, an independent law-enforcement agency formed at the behest of the United States and European Union, and partly trained by the FBI, was targeted by a government campaign earlier this month intended to wipe out its independence.

While the bureau survived, its investigations into UkrOboronProm, a sprawling concern with 80,000 employees, could put it back in the crosshairs.

These latest allegations come amid a decision by U.S. President Donald Trump’s administration to allow the export of lethal equipment to Ukraine, which is fighting Russia-backed separatists in the eastern Donbass region of the country.

The State Department on Wednesday confirmed that it approved a commercial sale of sniper rifles and associated equipment to Ukraine.

Yet even as Ukraine obtains Western military equipment, its own defense industry remains mired in corruption.

A 2017 report written by the anti-corruption bureau, and provided to Foreign Policy, alleges that officials at UkrOboronProm siphoned off funds from a $39 million contract to supply parts for Antonov AN-32 aircraft to the Iraqi defense ministry.

UkrOboronProm, which has been trying to make inroads into the Western arms market, is often singled out as a prominent example of corruption that hurts Ukraine’s relationship with its most important supporters, and critics blame it for harming Ukrainian soldiers fighting Russian-backed forces in the east.

The documents show that the anti-corruption bureau was looking into two executives at UkrSpecExport, the concern’s export arm, and an Indian citizen living in Ukraine’s capital, Kiev, who allegedly transferred around $6 million to the bank account of a company, called Paramount General Trading, in the United Arab Emirates.

The UAE-based company was supposed to acquire the spare parts, however, an investigation found that the company did not supply anything, and the parts were furnished from existing UkrOboronProm stock.

The bureau concludes the “bank accounts were used … by UkrSpecExport officials for acts of corruption in connection with laundering of criminally obtained money.”

Efforts to to reach the individuals implicated in the fraud allegations were unsuccessful.

The anti-corruption bureau’s report states that detectives discovered some of the money from Paramount General Trading’s account was transferred to various other companies and bank accounts.

For instance, a $140,000 payment was made to a Wells Fargo bank account belonging to a company called Aragon International Petroleum, whose beneficial owner was the daughter of one of the UkrSpecExport executives, according to the documents.

FP contacted five companies operating under the name Paramount General Trading in the UAE; all denied any connection to the executives named in the documents, or to the contract.

The report states the daughter had another account at ABN AMRO Bank in the Netherlands, which also received $140,000.

The anti-corruption bureau’s detectives suspected that funds were also transferred to another of the executive’s daughters, who is a U.S. citizen.

FP was not able to reach the daughters for comment.

The anti-corruption bureau earlier this year wrote to the criminal division of the Office of International Affairs of the U.S. Department of Justice requesting assistance in the investigation, according to documents reviewed by FP.

A spokesperson for the Department of Justice declined to comment.

UkrOboronProm spokeswoman Roksolana Sheiko said many of the corruption allegations are part of the Kremlin’s hybrid war propaganda offensive against Ukraine.

She admitted that the Iraqi spare parts contract was investigated by police and the prosecutor general’s office but said “there was no violation detected by the company or its officials.”

Sheiko said that the company has worked to counter corruption and instill transparency and will be cooperating with Transparency International to solidify reforms.

She said UkrOboronProm had dismissed many suspected wrongdoers and reported 158 suspect episodes.

“We don’t deny that not everyone works to the highest standards and in a spirit of patriotism but that’s the minority and they won’t last long on our team,” she wrote.

The presidential administration did not respond to a list of questions FP submitted but replied with a general statement.

“The accusations you mention are the part of a hybrid/information warfare against Ukraine and, in the vast majority, are not true,” the administration replied in a written statement.

“The spreading of these accusations is beneficial for the critics of the President in Ukraine and for Ukroboronprom’s competitors in foreign markets.”

This is not the first time the anti-corruption bureau has targeted Ukraine’s corruption-riddled arms industry.

Earlier this year the bureau’s head, Artem Sytnik, announced his office was investigating a slew of corruption cases at the state-run enterprise.

Investigators in July exposed a scam at an UkrOboronProm tank repair facility in the western city of Lviv where reconditioned engines instead of new ones were installed in 40 tanks being upgraded.

The plant’s director and two high-ranking army officers were arrested.

That hit a raw nerve at the presidential administration, because Petro Poroshenko, Ukraine’s president, appointed two former business partners to key positions at UkrOboronProm.

Despite coming to power in 2014 on a pledge to root out corruption, a main cause of the revolution that ousted his pro-Kremlin predecessor, Poroshenko has been accused by politicians, civil society activists, and key foreign supporters of Ukraine of failing to make good on his promises.

Critics accuse Poroshenko of preventing effective action against corruption and prolonging the dominance of a monopolistic kleptocratic oligarchy that feels itself above the law and has a stranglehold on Ukraine’s political system.

A billionaire businessman himself, he has been accused of shielding fellow oligarchs, including his own close associates.

The International Monetary Fund and others providing billions of dollars in financial assistance have made funding contingent on implementing anti-corruption reforms.

The bureau’s ability to operate unfettered by political red tape became a benchmark of whether the government was pursuing its commitments.

But the bureau’s investigations rattled and infuriated many important business and political figures — and Poroshenko’s allies.

The president’s supporters in parliament voted earlier this month to remove the head of the anti-corruption committee, Yegor Sobolev, an outspoken backer of the bureau.

Ukraine’s prosecutor-general, Yuri Lutsenko — another Poroshenko appointee — then accused the bureau of corruption, prompting an outcry from Western officials.

“It serves no purpose for Ukraine to fight for its body in Donbass if it loses its soul to corruption. Anti-corruption institutions must be supported, resourced, and defended,” U.S. Secretary of State Rex Tillerson said.

“I can’t remember a more strident criticism in the history of our country than the one from Tillerson,” said Oleksiy Skrypnyk, a member of parliament from Ukraine’s Self-Reliance Party, which Sobolev also belongs to.

“This administration is clearly saying that the U.S. cannot tolerate the situation.”

Skrypnyk, the deputy chairman of Ukraine’s Permanent Delegation to the NATO Parliamentary Assembly, has lobbied the United States to supply Ukraine with sophisticated Javelin anti-tank missiles, but said he believes the U.S. government has blocked the export because of concerns that some of the weapons would be illicitly sold to Russia.

The United States, Skrypnyk said, needs to tell Ukraine, “‘Guys, if you want sophisticated weapons, you have to make changes [corruption reform] so that we know where the weapons go. Make the changes and you’ll get a lot more.’”

In an interview with FP in Washington, D.C., Yevhenii Yenin, Ukraine’s deputy prosecutor general, acknowledged that the pace of efforts to fight corruption has been slow but argued that reform takes time.

“The expectations for new anti-corruption bodies are often very exaggerated,” he said.

“The scale of corruption is so huge that’s impossible to overcome this issue in one day or one year.”

He said thousands of people in the corruption-infested judicial system, including judges, have to be replaced, but sacking up to 10,000 people for the sake of show and trying to replace them swiftly with qualified personnel is impractical.

“When we started our task, it was like trying to completely dismantle a car and to keep it going at the same time,” he said.

“Explain to me how that’s possible?”

In the meantime, the government has backed away from its attempts to kneecap the anti-corruption bureau, but the agency’s spokeswoman, Darya Manzhura, wonders whether it’s just a temporary reprieve.

Manzhura said that the anti-corruption bureau can only perform its work effectively if the government delivered on a promise to create a specialized anti-corruption court staffed by respected judges trusted to resist political pressure, bribes, and threats.

Poroshenko has so far stalled on creating such courts.

“The importance of the anti-corruption court is to show people that a precedent can be set of investigating suspects, bringing them before a court, securing convictions, and punishing them,” Manzhura said.

Daria Kaleniuk, executive director of Ukrainian nongovernmental organization the Anti-Corruption Action Center, said it was vital to have a separate law-enforcement agency like the National Anti-Corruption Bureau that has powers to investigate activities of state companies “like this monster we call UkrOboronProm.”

But for now, even the future of Ukraine’s anti-corruption investigators remains precarious.

The efforts to dismantle the National Anti-Corruption Bureau are “an attempt to reverse some of the positive reforms in the field of corruption,” Kaleniuk said.

“We won the fight this month, but it doesn’t mean that we’ve won the war.”